Franklin BSP Realty Trust, Inc. (NYSE:FBRT) Q2 2024 Earnings Call Transcript

Franklin BSP Realty Trust, Inc. (NYSE:FBRT) Q2 2024 Earnings Call Transcript August 1, 2024

Operator: Good day and welcome to the Franklin BSP Realty Trust Second Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Lindsey Crabbe, Director of Investor Relations. Please go ahead.

Lindsey Crabbe: Good morning. Thank you, Cole, for hosting our call today. Welcome to the Franklin BSP Realty Trust second quarter 2024 earnings call. As the operator mentioned, I’m Lindsey Crabbe. With me on the call today are Richard Byrne, Chairman and CEO of FBRT; Jerry Baglien, Chief Financial Officer and Chief Operating Officer of FBRT; and Michael Comparato, President of FBRT. Before we begin, I want to mention that some of today’s comments are forward-looking statements and are based on certain assumptions. Those comments and assumptions are subject to inherent risks and uncertainties as described in our most recently filed SEC periodic report and actual future results may differ materially. The information conveyed on this call is current only as of the date of this call, August 01, 2024.

The company assumes no obligation to update any statements made during this call, including any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, we will refer to certain non-GAAP financial measures, which are reconciled to GAAP figures in our earnings release and supplementary slide deck. Each of which are available on our website at www.fbrtreit.com. We will refer to the supplementary slide deck on today’s call. With that, I will turn the call over to Rich Byrne.

Richard Byrne: Great. Thanks, Lindsey and good morning, everyone. Thank you for joining us today. Apologies in advance, I’m dialing in from a remote location. So if I’m not coming in loud and clear, I’ll try to talk louder and clearer. As Lindsey mentioned, our earnings release and supplemental deck were published to our website yesterday. I’m going to begin today’s call on Slide 4 by reviewing our second quarter results and then of course we’ll open the call up as always to your questions. The quarter was marked by several key developments. Jerry is going to detail our financial performance and Mike will cover market conditions in our watch list and REO portfolio, all of which in much greater detail, but first, I’m going to provide an overview of the quarter’s most significant events.

First, our origination engine was extremely active. We continue to see great deal flow and originated $622 million in new commitments during the second quarter. Our year-to-date origination total is over $1.3 billion. The deals we have originated post the rise in interest rates are some of the best we’ve seen from a risk reward perspective in a very long time. A substantial and growing portion of our portfolio is from this new vintage, approximately 25% of our loan portfolio was originated in the last 12 months. We continue to deploy capital and grow our balance sheet because of the confidence that we have in our portfolio. Each new loan we originate enhances the credit quality of our book. Second, during the quarter our CECL provision increased by $31.4 million.

The increase was entirely related to a $32.3 million specific CECL provision on four watch list loans. This resulted in a $0.37 decrease to our second quarter book value and negatively affected GAAP earnings. The vast majority of the specific reserve relates to a Denver office property, which was downgraded to a risk rating of five this quarter. Next, there was a lot of movement within our watch list, which Mike will go over in some good detail, But I would be remiss if I didn’t touch on a very positive note that between Q2 and shortly into Q3, we were able to liquidate 18 Walgreens properties very close to our marked basis. We only have five remaining Walgreens stores REO. As it relates to watch list on REO, what we are experiencing now is very common at this point in the cycle, especially after the high volume of originations in the 2021 vintage and as Mike will detail, we already have had positive developments on some of our watch list names subsequent to quarter end.

Next at quarter end we had $700 million in available liquidity. Our ability to grow our loan portfolio decreased our liquidity position from the first quarter, but we are very comfortable with the amount of liquidity we have today. Next, we purchased three million of FBRT common stock during the second quarter inclusive of the first quarter, we have repurchased almost five million of FBRT common shares in the first half of 2024. In total, since the program began, the company and its advisor have purchased nearly 69 million of FBRT common stock. Lastly, notwithstanding Denver, it was a solid quarter. This is not to say we think we’re completely out of the woods with respect to the pre-rate increase loans still on our balance sheet, but we like where FBRT is and where its overall positioning is.

Our originations have been at favorable levels and we continue to support our stock. We believe our solid financial position will allow us to emerge from this period as a market leader. With that, Jerry, let me turn things over to you.

Jerry Baglien: Great. Thanks, Rich, and thanks for everyone joining us on the call today. Let’s move on to results and I’ll start on Slide 5. FBRT reported a GAAP loss of $3.8 million or $0.11 per diluted common share this quarter. The decline in GAAP net income is largely due to the increase in our CECL reserve as Rich mentioned and lower quarter-over-quarter conduit income. Our CECL reserve reflects a $32.3 million specific CECL provision across four watch list loans this quarter. It reduced GAAP earnings and book value per share by $0.37. Book value at quarter end was $15.27 which incorporates $0.93 per share of CECL reserves. The Walgreens assets sold close to our marked basis, but did result in GAAP net income being reduced by $4.3 million this quarter.

That’s net of minority interest. This consisted of $1.9 million in asset write downs based on the closing sale price of the 18 stores and $2.4 million of abated rent that was credited to the buyer in association with the sale. We earned 32 point in distributable earnings in the second quarter or $0.31 per fully converted share. Distributable earnings were lower this quarter largely because of the realization of the loss from the Walgreens that we had previously recognized in our GAAP earnings and that is now flowing through distributable earnings. There will be an additional impact to Q3 distributable earnings associated with the realization of the loss from the 16 additional stores that settled in Q3 and that’s approximately $25 million. On Slide 7, you can see that we had strong portfolio growth of $195 million this quarter, driven by new loans exceeding repayments.

Six loans were repaid during the quarter from the multifamily and hospitality sectors. Turning to Slide 8, our average cost of debt on our core portfolio decreased slightly to 7.8%, although our average debt outstanding increased to support the growth in our portfolio. We continue to have available liquidity on our warehouse lines and increased demand from our lenders to finance new loans. This strong interest reinforces the quality of our recent loans. On our core book, over 80% of our financings are non-recourse, non-mark to market. We have reinvest available on one of our CLOs as of today. While we’re comfortable right now, we’ll stay alert for opportunities in the capital markets down the road. This lets us strategically tap into CLO financing when aligns with our future funding needs and when market conditions are favorable.

Our net leverage position increased to 2.7 times at the end of the quarter. This increase in net leverage is mainly driven by the growth in our portfolio as we have found attractive investment opportunities throughout the second quarter. With that, I’ll turn it over to Mike to give you an update on our portfolio.

Michael Comparato: Thanks, Jerry, and good morning, everyone. Thank you for joining us today. I’m going to start on Slide 12. Our $5.4 billion core portfolio consists of 153 loans with an average size of $36 million. As you can see, 99% of our loans are senior mortgages. Our portfolio breakout has not changed. We are focused on originating predominantly high quality multifamily assets, while looking to other asset classes to add additional yield. We are confident in the playbook we have followed to build our current portfolio and believe it is the right way to approach and take advantage of the opportunities at hand. On previous calls, we’ve shared that we meaningfully reduced our originations backed by 1970s 1980s vintage multifamily assets in the fourth quarter of 2021 and focused on higher quality, newer multifamily assets in large liquid markets.

We have limited exposure to secondary markets and have nearly no exposure to tertiary markets. That decision was paramount to our current market advantage and our ability to actively originate new loans. In recent quarters, I’ve touched on the mountain of equity capital searching for multifamily assets. It has only grown stronger. We’ve seen the largest names in the space from Blackstone to Brookfield to KKR acquire billions in large multifamily transactions in just the past six to eight weeks, but to put a finer point on just how deep transaction that we are currently selling in the Sunbelt from one of our managed equity vehicles. The property was marketed by a national brokerage firm and we received 324 executed confidentiality agreements, conducted 46 site tours and ultimately received 47 written offers, 21 of which were inside of a five cap.

That is a staggering amount of participants looking to put equity to work and reminds me of late 2009 early 2010 in terms of demand meaningfully outweighing supply coming out of a financial shock. Let me be clear, there is no lack of demand stabilized multifamily assets. What the market is experiencing is a lack of willing sellers. Moving on to slide 13, during the quarter, we originated 18 loans at a weighted average spread of 318 basis points. We continue to see solid opportunities this quarter and the forward pipeline is strong. The transactions we are adding to our portfolio offer highly accretive terms with better underlying credit metrics versus loans written over the past several quarters. Our conduit platform was also active in the second quarter, although it generated lower income quarter-over-quarter.

We expect Conduit revenue to contribute to earnings in the coming quarters. We view the Conduit as an excellent earnings enhancer in good times, but also as a gain on sale business that can offset core balance sheet losses and more difficult market conditions. FBRT is on a very short list of mortgage REITs that benefit from having this gain on sale business. Slide 14 is a summary of our watch list. We ended the quarter with seven loans on our watch list. Five loans are risk rated four and two loans are risk rated five. While neither of the five rated loans are in default nor have ever been in default, given our recent appraisals, it was difficult not to downgrade these two positions from last quarter. Subsequent to quarter end, we had positive updates on several of our watch list loans.

The borrower sold a Dallas hospitality asset very close to our basis. We modified a 272-unit Fort Worth multifamily loan resulting in an additional principal pay down and a new rate cap being purchased and we came to a verbal agreement with the borrower on our Charlotte, North Carolina multifamily property to pay the loan down and extend the loan further. We expect that extension will be executed shortly. The remaining loans on watch list are a portfolio of multifamily assets and various locations in the Sunbelt. This was $147 million cross collateralized loan backed by 15 multifamily assets. The loan has been paid down to approximately $102 million through five asset sales and five of the remaining 10 assets are currently under contract to be sold with the remaining five assets in various stages of the sale process.

We are not accruing interest on a monthly basis on this loan, but we are sweeping all cash and recognizing cash income or excuse me, recognizing interest income as it’s received. A 176-unit apartment community in Fort Worth, Texas that we have commenced foreclosure proceedings, but are in active dialogue with the borrower. The CBD High Rise Office Building in Denver, Colorado. This is the loan that we took the majority of our specific CECL provision against in the second quarter. We made a significant modification to the loan collateralized by this office building and as part of that modification, we obtained a new appraisal for the collateral. The valuation difference between the appraisal and our loan balance drove the increased reserve. The loan has not been in default and has remained current on debt payments.

The asset is now on our books at a substantial discount to its original principal value. I personally toured this asset just last week and I’m pleased to report the institutional sponsor has kept the property in very good condition and we will continue to work with them in coming quarters. The final loan on our watch list is a suburban Class A office building in Alpharetta, Georgia. he loan is not in default and the borrower has contributed millions of dollars of equity to pay down the loan and keep it current. We also had this asset appraised and took a specific reserve to adjust for the value differential. With regard to the rest of our office portfolio, excluding our largest office loan, a triple net lease headquarters and distribution facility, our pre 2024 originated office exposure has been reduced to only $178 million or 3.3% of our core portfolio with our second and third largest office loans having principal repayments in just the last 60 days.

In addition, excluding the Denver and Alpharetta office assets, our weighted average in place debt yield of our pre 2024 originated office portfolio is approximately 13.2%. We will continue to actively work towards zero exposure to pre 2024 originated office loans. Lastly, on office, just a quick note on the market and our 2024 originated office loan. That loan has performed exactly as expected with seven properties sold since origination and our original $55.8 million participation in FBRT has been paid down to $18.1 million. We could not be happier with the progress so far. Sentiment for office is clearly off the lows. While the realization of losses has likely only just begun, the CMBS market is open for stabilized office buildings with good narratives and we’ve begun to see bridge lenders dip their toe back into the sector.

In fact, a CRE/CLO was just priced last week that had an 8% office contribution. Lender appetite for office credit is opening up again, albeit very, very slowly and only for the right opportunities. Moving to slide 15, we held six foreclosure REO positions at quarter end. These positions are a Portland office property, which we continue to believe is not the right time to exit the asset, a 426-unit apartment community in Cleveland, Ohio. This asset was taken via mezzanine foreclosure and was one of the resolutions to last quarter’s watch list. Our asset management team is on-site regularly and we have installed the largest property manager in the country to manage day-to-day operations. A 471-unit apartment community in Raleigh, North Carolina.

This asset was also taken via foreclosure together with two other multifamily assets in Mooresville, North Carolina and Chapel Hill, North Carolina. We have installed one of the largest property managers in the country to run all three of the North Carolina assets overseen by our internal equity asset management group. Mooresville is nearing 90% occupancy and should be headed to the market for sale shortly. As for the Raleigh and Chapel Hill assets, I also visited these properties just a few weeks ago. These are very solid assets and good locations. We will take the time needed to improve the assets, stabilize the assets and look to liquidate them in the future. The Lubbock multifamily property occupancy is up 30 points in the last 90 days and our asset management team continues to meaningfully improve the asset.

We expect to be in a position to liquidate the asset in the coming quarters, and our last foreclosure REO is our Walgreens portfolio, which Rich and Jerry have already covered, but I will happily reiterate that we only have five locations remaining. I want to add a note regarding our liquidation of the multifamily assets we’ve taken back as REO. While I previously mentioned the mountain of equity looking for multifamily acquisitions, there is a meaningful pricing gap between stabilized assets and non-stabilized assets. We firmly believe that taking over an asset, stabilizing it and liquidating it will result in higher recovery value than a loan liquidation or an as is sale of a non-stabilized asset. In addition, we continue to be overall bullish on the next few years in the multifamily market.

With rates hopefully declining and new supply burning off, owning some real estate right now isn’t necessarily a bad thing. Lastly, contrary to prevailing view, not all multifamily loans originated in late 2021 early 2022 are problematic. Property location, vintage and loan structure influenced loan performance, asset liquidity and value. Year-to-date, we have been successfully repaid on approximately $521 million in multifamily loans, loans, of which $462 million, or almost 90% were originated in Q3 and Q4 of 2021 or Q1 of 2022. While we acknowledge challenges exist within this vintage, it is inaccurate to generalize about the entire vintage other than to collectively agree it was a recent peak valuation for the multifamily sector. As we look at the company’s overall positioning, we believe FBRT will emerge as a market leader once this repricing cycle at hand plays out.

Current industry challenges will likely persist for the next several quarters and our asset management team is working to resolve loans in REO in a manner that will ultimately maximize recovery value for shareholders. To conclude, we will continue to lead with transparency and we will provide updates as we make progress on final loan and REO resolutions. The current opportunity in CRE credit has been and continues to be compelling and we are excited by what this vintage of new loans adds to our portfolio. And with that, I would like to turn it back to the operator to begin the Q&A session.

Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question today will come from Matthew Erdner with JonesTrading. Please go ahead.

Matthew Erdner: Hi good morning guys. Thanks for taking the question. Jerry, the first one is for you. Can you repeat what happened with the Walgreens and that kind of $25 million that’s going to hit next quarter?

Jerry Baglien: Sure. The $25 million that I referenced is essentially the realization difference in Q3. So we sold 18 stores and most of those settle in Q3. Our distributable is meant to capture the cash effect of our earnings and so that cash effect or the realization effect that rolls through in Q3 not Q2 and so that’s why I mentioned that in Q3 you’ll have that flowing through the distributable portion of our earnings. We obviously already ran that through GAAP, so you won’t have a change to the book value, but in order to kind of keep the consistency between what we show in distributable, what we show in our GAAP earnings, it’s going to come through there. So it’s really just a reminder in terms of how we flow through that income effect on our transactions.

Matthew Erdner: Yes, that’s very helpful, and then I want to touch on the Denver asset a little bit. You mentioned that you are talks with the BAR over there and had good conversation. Is there any kid of additional timeline that you guys are able to get around that asset and then what are your thoughts on if you have to take it on, how long would you guys look to hold that and would it be similar to the Portland one?

Michael Comparato: Hey, Matt, it’s Mike. Thanks for the question. Look, I think we just entered into I think it was a quarter or two ago and we mentioned it when it happened a quarter or two ago. We just entered into this modification with them. The asset continues to perform generally in the same spot. As I mentioned today, it’s not in default. It’s never been in default and I think both sides are doing everything that they can to push this out and see where the market goes. Clearly, office is the worst asset class in the industry by a long shot. Liquidating assets today is not an enjoyable experience. So, I think everybody is looking for time. Again, I think the fact that they’ve done a great job keeping the asset in the condition it’s in.

They have an exceptional amount of equity invested into the property. All we can do is continue having phone calls, continue having dialogue and going from there. If it ends up being REO at some time in future quarters, obviously, we’ll have to reassess it at that time and where the market is, but for now, not in default, continue having conversations and we’ll continue to try to be as constructive as we can.

Matthew Erdner: Thanks for that.

Operator: Our next question will come from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws: Hi, good morning. First, Jerry, maybe if I could start, what was the NII drag this quarter from loans that you’re not accruing interest or using any interest received to pay down loan balance and then as you think about resolutions, Mike, I appreciate you running through a lot of details. It seems like a few of these assets are potentially second half resolutions. Could you make highlight which ones you think, can potentially get resolved this year?

Michael Comparato: Jerry, why don’t you start?

Jerry Baglien: Yeah. In terms of the drag, it’s a mix of different things kind of coming in and out in terms of nonaccrual and sort of — nonaccrual for us also has the two different buckets, stuff that’s on pure cost recovery where we’re actually reducing the basis and then the other income where like Mike mentioned before, we’re not accruing, but we’re recognizing the cash interest income as received. So it’s roughly a $4 million difference in terms of the drag that puts on the portfolio. So even with all the portfolio growth, there is a little built in drag there from what I would call the friction of turning over some of these assets as we kind of work through them.

Stephen Laws: Great. And on that, you know, working through them, Mike, kind of thoughts on which ones can get resolved in the back half of this year?

Michael Comparato: Yes. So, Stephen, obviously, we’re subject to market and what we can do. As I said in the prepared remarks, we think it’s far more important to stabilize these assets before liquidating them and I think the team is on-site regularly doing what needs to be done to get them in those positions. I would hope that the asset in Mooresville and Lubbock are resolved by year end. I think there’s a chance that Raleigh and Chapel Hill could be resolved as well by year end and then the watch list loans, we just continue to work through those, right? The large portfolio, the $102 million outstanding today, they’ve got five under contract. They’ve got the other 5 in various stages of LOI or contract negotiation. So, hopefully, that loan will be lower next quarter than it was this quarter and we just keep chopping away kind of on all of these things.

It’s an active part of our everyday and as we said here, there’s seven loans that we put on watch list, but just from quarter end to this call, we have resolutions on almost half the watch list. So, it’s just one of those things that this is going to be a very — requires a lot of communication with everybody because it’s moving and changing literally on a daily basis as we make progress through the watch list.

Stephen Laws: Thanks, Mike. I think that certainly, highlights the liquidity around multifamily, that you that you mentioned in your prepared remarks. You know, one last question more on the offense side of new originations. Can you talk about you know, you guys have done a ton of originations this year continue to be active. What’s really separating you winning those deals? There’s not a lot of transactions out there. It’s pretty competitive. So can you talk about your positioning against peers in the in the lending market today? And then what’s your, you know, capacity for continued growth as you think about, you know, where what leverage levels you’d like to operate and kind of how much more, capacity do you have to bring on new originations?

Michael Comparato: Yes. So I think the banking sector historically has provided about half of the market for credit and CRE and the banks are largely on the sidelines and we continue to think that they will be on the sidelines for the next 12 to 24 months, and even when they come back into the pool, it’s never a cannonball for the banks, right? It’s dipping a toe and getting to the ankle and then the knee. So I don’t think banks are coming back as a meaningful competitor anytime soon. The balance of the mortgage REIT sector is I think a few of them might start slowly originating again, but the reality as we all know is a lot of industry peers have 30%, 40% exposure to legacy office loans and that’s just really difficult to originate in the face of that, and I think they’re having to hold capital to solve those issues in the future.

So, the competitive landscape today is meaningfully less than what it was in 2021, but then again, it only takes three or four competitors to create a fairly competitive market. So I’m not going to sit here and say that, you know, it’s us and nobody else. Clearly, that’s not the case. Where I do think that our platform is meaningfully differentiated from others is we do everything and I think if you look at the middle market, which clearly that’s where we’re looking to compete kind of in that $25 million to $100 million loan range that the middle market is generally populated with a bunch of non-align lenders, right. They do one thing. They’re a mezzanine lender only or they’re a bridge lender only or they’re a construction lender only or some of them only focus on one asset class.

Yes, we do everything and I think that all of those products really has been driving our origination because it’s a few $100 million in all of those different categories. So as I said last quarter, I believe, it was the first quarter in a long time where all of the cylinders were hitting from the construction loan business, the bridge loan business to the conduit business, and I just think we’re slightly differentiated given the breadth of our products and that’s been driving our origination.

Stephen Laws: Great. Appreciate the comments this morning. Thank you.

Operator: Our next question will come from Thomas Catherwood with BTIG. Please go ahead.

Thomas Catherwood: Thank you and good morning everybody. Maybe starting with Rich, you mentioned how 25% of the loan portfolio has been originated within the last year. When do you think the portfolio reaches an earnings inflection point where contributions from these new originations fully offset any drag from non-accrual and REO migrations?

Richard Byrne: Thanks, Tom. Good question. Yeah, I mean, we’re going to start tracking our post sort of rate increase portfolio exposure on an ongoing basis. Obviously, it’s going to be a function of two ends. One is new loans that we originate as well as resolutions on the existing portfolio. Just simply put, the vast majority of ours and probably most of our peers portfolios reach final maturity over the vast majority of the loans if they haven’t already over the next handful of quarters. Of course, some modifications or extensions that will have that play out over most likely over a longer period of time for all of us, but as Mike said, we just continue to chip away at the watch list and REO portfolios. We sort of think of it as work in progress.

You have raw material, you have finished goods is what gets out the other side and then in the middle is just the work it takes. So sort of artificially at the end of every quarter, in this case, 630, we’ll always have things drop into that spot. So, long way of saying that it’s going to take a few quarters to, and you’ll see meaningful improvement, but to get to the other end of getting out of all your 2021 vintage exposure, it might take obviously longer than that.

Thomas Catherwood: Understood. Thank you. Thank you for that, Rich and then, Mike, appreciate all the color on the watch list and REO assets and commentary about which ones we could see kind of sales activity on through the end of the year. Specifically, on the Raleigh and Chapel Hill assets, how much more needs to be done to get to stabilization there? Is it just blocking and tackling on the leasing front? Or is there more work to be done on the assets themselves, more capital that needs to be put to work?

Michael Comparato: We were on-site yesterday, and I would say the feedback is generally blocking and tackling. I think the better question and Tom, I’ve been doing this for 30 years and I’ve been on the equity side of the business and the credit side of the business. I think the question that we’re also asking ourselves is, does it make sense to own some of these for a little bit, right? I mean, going back to my prepared remarks, if Blackstone and Brookfield and KKR are backing up the truck buying multifamily, maybe these things are going to be worth meaningfully more, 12, 18, 24 months from now. So it’s not just a matter of let’s fill it and sell it fast as humanly possible. We are looking at this through a lens of opportunity.

Are there chances to make money on some of these assets? And so I think we’re in that we’re in the process of figuring that out now. We certainly want to get the stabilization as fast as we possibly can and then we’re going to evaluate, does it make sense to liquidate today or do we think that these could be worth meaningfully more in the future and the reality is, while we’re dealing with this wave of supply, it is not only coming to a screeching halt in the multifamily sector, it is falling off a cliff and I think we are going to be grossly undersupplied in multifamily in 2026, 2027 and 2028. So, I think there is a very reasonable chance that you could go back to very strong rent growth, see a lot of NOI growth and so, again, we’re going to always do what we think is best for shareholders.

That could be fill it and sell it as fast as possible, but in certain instances, if we see a real opportunity to make dollars, we’re not going to just hand those profit opportunities to other parties.

Thomas Catherwood: Appreciate those answers. Very much looking forward to see how that all comes together. And then maybe last one for me, Jerry, on the funding side, what are your thoughts about putting the new originations on the repo line at this point versus tapping the CLO market and kind of how wide is the gap in the spread between the two maybe before you would be more willing to pursue more CLOs?

Jerry Baglien: Great question and something we keep a very close eye on. I’m sure you’re not surprised to hear. Right now what we’re seeing in terms of pricing on bank lines is extremely accretive. I think and I believe I’ve said this before, loans that are recently originated kind of on adjusted basis that we’re lending on with prices down where they are, the attachment points are pretty phenomenal. So the pricing we’re getting on the bank side is really good. So I think we have the luxury of being a little patient in terms of waiting to get a deal together, looking for the right point in the market and being particular about when we go out and getting all the structure points that we want. In terms of differential, I think it’s a little hard to say.

It’s probably slightly wider on the CLO side than the bank side on a combined cost of funds, but the differential you have to consider is the amount of leverage you can get, obviously get the non-mark to mark reinvest in some ramp. So I think you have to look through the concept in its totality and I think it’s getting closer to the point where it probably makes sense. So I would guess at some point later this year, we’re probably active in that market.

Thomas Catherwood: Understood. I appreciate those thoughts. That’s it for me. Thanks everyone.

Operator: Our next question will come from Chris Muller with Citizens JMP. Please go ahead.

Chris Muller: Thanks for taking the questions. So I guess given the pullback in rates recently and likelihood of rate cuts starting in September, how are you thinking about volumes in the conduit business in the coming quarters? And do you have any expectations for margins there going forward?

Michael Comparato: Thanks for the question, Chris. Look, I think conduit has become a low cost of capital option again, and so people are gravitating back to it. The reality is the volume that we’re seeing today is multiples of what we saw in 2021 and 2022 and 2023. So, we are going to continue to be as active and as aggressive as we can in that space, right? It’s kind of the one business, as I said again in the prepared remarks, where we can make meaningful millions of dollars in any given quarter. That’s either an earnings enhancer in the good times, but also can offset losses in the tough times as we get through kind of the rest of this repricing cycle. We historically have made anywhere from two to five points on our conduit business.

I think we’re clearly not a volume focused originator. We’re a margin and P&L focused originator and I would suggest that we will continue to target that kind of margin going forward. We’re just not in the business of writing conduit loans to make a half point. That’s not the best use of our capital.

Chris Muller: Got it. That’s helpful. And then, I guess, the follow-up I have. So on the multifamily North Carolina foreclosures, were those all with the same sponsor? And if so, do you have any other exposure to that sponsor?

Michael Comparato: They all were with the same sponsor and we do have additional exposure to that sponsor. I will say we’ve been in very active dialogue with them on all of the loans that we have with them and some will be repaid in full, some will be repaid a little bit less than full, some we will take back in REO. It just kind of stretches across the gamut but look, at the end of the day, I would rather have almost any multifamily asset versus an office asset today. So we continue to like where we’re positioned overall compared to the balance of the industry.

Chris Muller: Got it. That’s very helpful. Thanks for talking questions.

Operator: Our next question will come from Matthew Howlett with B. Riley. Please go ahead.

Matthew Howlett: Hey, thanks for taking my question. Just on pricing, I mean you originate a little over 300 basis points, but just what are you seeing between the various asset classes in terms of when we’re hearing multi, new multi now is under 300. Talk a little bit about that, talk a little bit about where the floors are, that you’re originating?

Michael Comparato: Hey, Matthew. Good morning. Yeah, I would say very middle of the fairway multifamily origination today is probably in the sub-three hundred pricing range and I would say construction lending on multifamily is probably 200 basis points to 250 basis points wider than that at lower attachment points. We continue to think the construction lending business is probably the best risk return of anything out there. Unfortunately, it’s just not an efficient asset, right? We don’t get to put the capital to work all right away. It dribs and drabs over the 18-month construction period and then I would say hospitality is probably 150 basis points to 200 basis points wide of where multifamily is pricing depending on the specifics. Industrial largely pricing very close to multifamily. In terms of sulfur floors, I would say we’re generally getting sulfur floors anywhere between 3% and 4% on new origination, with the occasional outlier in either direction.

Matthew Howlett: And when you see attachment points, are we talking — were we talking 40% for I mean on the construction side?

Michael Comparato: No, I mean I think the generic market today again for an existing multifamily asset that’s a light touch transitional or a TCO takeout just to fill it up, generally a senior loan today is about 70% loan to cost and on construction, you’re seeing kind of low to mid-60s loan to cost. So maybe 5 to 10 points lower in loan to cost attachment, but a 250 basis point premium on pricing, which is, again, when you’re focused on three-story stick build multifamily and suburbia anywhere U.S.A., we just believe that that pricing premium for the construction risk is outstanding, right, this isn’t a complicated construction. This is conduction that any GC can complete and we really like the space, but again, it’s just not an efficient asset for a mortgage REIT. So, we kind of limit the overall exposure that we have there.

Matthew Howlett: But the banks must have really backed away from that construction lending site recently?

Michael Comparato: Well, Well, they went from probably 90% to 95% market share to completely out of the business, I would say, from March or April of 2023 to maybe six months ago. We’ve anecdotally heard about a few of them stepping back into the market closer to like the 50% loan to cost range and then borrowers are still going out looking for mezzanine and/or preferred equity to kind of get the debt stack to the mid-60s in terms of construction loans but look, the reality is you can buy almost any asset across the country for less than what you can build it for today. So putting a shovel in the ground from an economic standpoint on building a new multifamily asset, it’s really, really difficult to make those numbers work. You know, does that dynamic change over the next few years? You know, obviously, remains to be seen but when it’s cheaper to buy than it is to build, you don’t typically see a lot of shovels going into the ground.

Matthew Howlett: Right. That’s a great opportunity for you guys and look forward to growth in the platform. Turning to funding, I know you’ve addressed the bank lines and the CLOs. We keep hearing from the calls, people are buying AAA, how great that market is and are looking at the CLO market, $190 million, $200 million over. I don’t know what the latest deal price at, but I mean, is that market going to tighten? If you look at it and say, hey, well, this market is going to tighten significantly at some point and we’re going to do a CLO deal. We’ve heard maybe you could comment on advance rates like 85% we’ve heard on that and will you refinance some of your — if you can get great execution will you refinance some of the CLOs or other reinvestment period that are deleveraging, just walk me through that market because you guys have been great at it and the execution over the years have just been tremendous.

Just comment on where the market is and what you’ll do to tap it?

Michael Comparato: Yes, I mean, I think we’re one of the most active players in the market from all sides, right? We’re active buyers of bonds and we’re also a very active issuer and while we have bought AAA in the past, if you believe that values are at least troughing or close to troughing today, from a relative value standpoint, I think we find more value in buying the credit bonds in the bottom part of the stack. Right? You’re achieving nine handle coupons on investment grade bonds, you know, single A or triple B bonds and maybe sulfur tightens a little bit, but still an eight handle on that is a really nice investment. Clearly, you’re giving up some liquidity versus the liquidity in the AAA tranche, but we don’t view them as trading instruments.

Yes, they have a CUSIP, yes, they’re liquid, but when we buy these, they typically go to bond heaven and we just hold them until maturity. In terms of issuance, it’s a conversation that we have with the Capital Markets Desk and Jerry multiple times a month and the analysis is actually very simple, right, because the non-economic benefits of the CRE/CLO just massively outweigh the non-economic benefits of warehouse financing. Right? You take a nonrecourse, non-mark to market match term funded liability, you know, that we’re going to pick that every time. So then it really just comes down to economics. So if the economics are equal to a warehouse facility, you issue the CRE/CLO as fast as you can. If they’re better, you run even faster. Really the only analysis is when the economics of keeping a loan on warehouse far outweigh the economics of the CRE/CLO execution, that’s where you have to think about the non-loan specific things.

Do we want extra cash? Do we want this? Do we want — so it’s a constant conversation that we have. I think the market is incredibly undersupplied at the moment. Almost any SaaS B deal, CRE/CLO that’s coming to the market is getting gobbled up very, very quickly. So, we’re looking at it today. We’re looking at it constantly and we’re always going to execute where we think is best for shareholders.

Matthew Howlett: I mean, trying to read between the lines, so would you when you get ready would you be running to that market today and given what you said things are getting gobbled up and maybe more supply will help tighten those spreads, but it sounds like latency advance rates are just like incredibly 85% and obviously the non-recourse feature, so why wouldn’t you just tap that market whenever you can now?

Michael Comparato: Yeah, I mean we’re now we’re getting into the weeds which I love, but look, I think while cap rates have widened, I don’t want to get into the agency underwriting business, but as cap rates widen, you know, agency kind of stress cap rates have stayed constant for 30 years, so leverage available in these CRE/CLOs is going up and while that’s available, I’m not sure that we want to use all of that. Right? I’m not sure that we want to be, you know, five times levered on a CRE/CLO. And in fact, I can tell you definitively, we don’t want to be five times levered on the CRE/CLO. So, regardless of those leverage points, I think we always typically want to be holding the bottom 20% to 25% of any CRE/CLO that we issue.

The market is open. The market is liquid. I think we get probably today a little bit better leverage than warehouse, a little bit lesser pricing than warehouse, but net-net, the economics are probably very close to each other. So, yeah, I wouldn’t — we’re actively looking at the opportunity to issue today.

Matthew Howlett: Yeah. Well, I’ll just say equity investors get very excited when you start creating the CLO deals at double digit ROEs and you guys have done a great job track record of doing that. So look forward to continued success and thanks for taking my questions.

Operator: This will conclude our question and answer session. I’d like to turn the conference back over to Lindsey Crabbe for any closing remarks.

Lindsey Crabbe: We really appreciate you joining us today. Please reach out if you have any further questions. We look forward to speaking with you soon. Thanks and have a great day.

Operator: [Operator Closing Remarks].